Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios

Andreas Kamp, Andreas Pfingsten and Daniel Porath

No 2005,03, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.

Keywords: bank lending; loan portfolio; portfolio theory; diversification; concentration measures; distance measures; focus (search for similar items in EconPapers)
JEL-codes: C43 G11 G21 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-ban, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:4258

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